Burning Brimstone Promises Fresh Hell for Coal

(Bloomberg Opinion) -- For all the disruptions ricocheting through the global oil market as its traditional sulfur dumping grounds of marine bunker fuel and Indian petcoke clean up their act, there's a darker cloud of pollution billowing on the horizon.

Just 30 percent of global industrial sulfur dioxide emissions come from petroleum. The biggest share, at around 50 percent, comes from burning coal — and there, too, new regulations are set to disrupt markets.

South Korea this month adopted rules forcing generators to buy coal with a maximum average sulfur content of 0.4 percent, as part of a suite of measures intended to reduce particulate smog.

That's a potential upset to the global coal trade, because most of the higher-value rock in the seaborne market is well above those levels. The lowest-sulfur coals are typically the peaty, brown varieties that contain the smallest amount of energy per kilogram. Since coal is mainly priced on its heating value, those types are cheaper, and are consequently less-traded internationally. As coal rank improves toward the harder, blacker, costlier and more tradable varieties with the highest calorific content, so sulfur concentrations tend to rise as well.

The results of that are already showing up as Korean utilities adjust their supply to accommodate. In May, trailing three-month imports from Australia hit their lowest level in almost 10 years. Australia's coal is relatively low in sulfur compared to others in the seaborne market, but no major exporter can boast average national sulfur concentrations that will meet Seoul's new rules, as illustrated by this chart from consultancy AME Group:

As a result, generators will have to buy more product from mines that combine so-so heating values with extremely low sulfur content. These coals, such as that from some of PT Adaro Energy's Indonesian mines, can be blended with more calorific, sulfurous grades from elsewhere to produce an acceptable mix — but the result is likely to weaken the premium that higher-ranked coals from Australia and Colombia have enjoyed in recent years.

If this was purely an issue for Korea — the fourth-largest seaborne coal importer after China, Japan and India — then it might not be considered important. However, other countries are looking to tighten their regulations, too.

A plant burning coal with 0.5 percent content will typically have about 1,350 milligrams of sulfur per cubic meter of its unfiltered emissions, but new standards in some key markets will go well below that.

India — home to half of the world's 40 most polluted cities — now requires newly built power stations to have less than 100 milligrams in their smokestack emissions, with older plants limited to 200 milligrams or 600 milligrams for smaller generators. China has imposed a ceiling of 35 milligrams on new plants and 50 on most existing ones, and often-lax enforcement is becoming more stringent. Each set of new regulations is tighter than those in force in the U.S., the European Union and Japan.

It's not rocket science to get emissions down to those levels. Scrubbers or flue-gas desulfurizers pass furnace gas through a limestone slurry to produce gypsum, or plaster of Paris, and can typically remove up to 99 percent of sulfur dioxide emissions. The efficiency of this technology is one reason that anthropogenic sulfur dioxide has been declining on a global basis since the 1970s, and it's quite probable that the gypsum drywall being used in your kitchen renovation originated in the smoke from a coal-fired power station.

The problem is that scrubbers aren't cheap, and get drastically less efficient the more sulfur you need to remove, so they don't like to deal with high-sulfur coals. One reason the center of U.S. coal production moved west since the 1970s is that generators switched from high-energy, high-sulfur Illinois coal to the lower-energy, lower-sulfur product from Wyoming's Powder River Basin.

What does this mean for the global seaborne coal market? Much of the argument in favor of its continued relevance at a time when renewables are nearing or below cost parity with new coal plants is that higher-energy Australian, South African and Colombian coals produce less carbon dioxide than local product. In theory, that would give seaborne soot a fresh market as lower-quality domestic production is shut — pretty much the dynamic that's played out in China in recent years, driving Australian export coal to its recent six-year highs.

If sulfur dioxide enforcement is stepped up, though, that forecast may prove less robust — sending the balance back toward lower-ranked local product that can meet sulfur emissions standards more cheaply.

The world's fossil fuels face plenty of challenges over the coming years as plummeting prices and the need to avoid catastrophic climate change cause renewables to gradually displace them. As we've seen in previous columns on marine bunker fuel and petcoke, removing sulfur from the mix will only accelerate that shift. Still, if we're to avoid the road to a hellish future, burning less sulfur is a good place to start.

Third in a series of pieces about sulfur in the fossil-fuel market. The first column, on shipping fuel, appeared on July 18, 2018. The second, on petcoke, appeared on July 19.

To contact the editor responsible for this story: Katrina Nicholas at knicholas2@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.